This paper explores the factors which eliminated the nonperforming loan (NPL) problem in Malaysia and Thailand following the 1997 Asian financial crisis. The number of NPL, which expanded in the aftermath of the crisis, has since declined in most South-East Asian countries. Although previous studies have explored the causes of the increase in NPL numbers, few have analysed the factors that contributed to the reduction in their number in Asia. In Malaysia and Thailand, authorities put in place several measures to manage NPL. As a vehicle to acquire NPL from banks, Malaysia established the Pengurusan Danaharta Nasional Berhad (Danaharta) in 1998, while Thailand established the Thai Asset Management Corporation (TAMC) in 2001. We analyse whether the characteristic features of banks, improvements in macroeconomic conditions, and facilities for purchasing loans caused a reduction in the number of NPL in Malaysia and Thailand. The results suggest that selling loans to a public asset management company was effective in reducing the number of NPL in Thailand. While macroeconomic conditions influenced the decline in NPL ratios in Thailand, in Malaysia, well performing commercial banks and large commercial and investment banks generally had smaller NPL ratios throughout and following the crisis.The governments of the Asian countries affected by the 1997 crisis have sought to rebuild their banking systems by restructuring and consolidating domestic banks. In addition, government authorities attempted to eliminate NPL by purchasing them from banks. 2 These measures may have had contributed to the reduction in number of NPL. 3 Since 1999, macroeconomic conditions have improved, and NPL have gradually declined in most South-East Asian countries. This paper explores whether the characteristic features of banks, the purchase of loans by NPL management facilities and improvements in macroeconomic conditions caused the reduction in NPL in both Malaysia and Thailand.It is important to discuss the policies that eliminated NPL in South-East Asia because this problem may also arise in other emerging economies. Although many studies have highlighted how NPL increased in the first instance and have discussed solutions to the problem, few have analysed why NPL declined in Asia and, in particular, the factors that contributed to the reduction of NPL in South-East Asian countries. In Japan, Hosono (2010) has investigated factors which caused NPL to decrease. Hosono looked at factors that increased the number of NPL as explanatory variables in the regression, and showed that land prices were an important contributing factor in the decline of NPL. In other work, Boudriga et al. (2009) used aggregate banking, financial, economic and legal environment data from a panel of 59 countries over the period 2002-2006 and empirically analysed the cross-country determinants of nonperforming loans.This study suggested that higher capital adequacy ratios and prudent provisioning policies appeared to reduce the level of problem loans. 4 Previous studies...
